How to create a cash flow forecast (and why your business needs one)

Learn how to create a cash flow forecast step-by-step and discover why it’s essential for managing your business finances, planning ahead and staying in control.

Our experts

We are a team of writers, experimenters and researchers providing you with the best advice with zero bias or partiality.
Written and reviewed by:

A cash flow forecast is your business’s financial crystal ball, a smart estimate of the money you expect to come in (such as from sales or customer payments) and go out (think supplier costs, rent, tax and other bills). 

While it won’t predict the future perfectly, it gives you a vital idea of what’s ahead. Will you have enough cash to cover your costs? Or is a squeeze coming?

Forecasts help you plan, make confident decisions and avoid nasty surprises – especially when times get tight. 

Luckily, you don’t need to be a maths whizz to build one – this guide will walk you through putting together a cash flow forecast. Alternatively, you can use small business accounting software to create and keep a cash flow forecast updated.

💡Key takeaways

  1. A cash flow forecast helps you plan, grow and stay in control. It shows how much money is expected to come in and out of your business, helping you manage finances, spot gaps in your revenue and prepare for growth or seasonal changes.
  2. Tailor your forecast to your audience. Use cautious estimates for internal planning and slightly more optimistic (but still credible and realistic) figures when presenting to banks or investors.
  3. You don’t need fancy tools to get started. A simple spreadsheet in Excel or Google Sheets is enough.
  4. Keep your forecast updated and scenario-ready. Review and revise your forecast regularly, especially after financial changes, and create best- and worst-case versions to stay prepared for unexpected challenges.

Why is a cash flow forecast important?

A cash flow forecast is a prediction of the money you expect to come into and go out of your business over a set period of time. It helps you to predict whether you’ll have enough cash to cover your expenses and make informed financial decisions.

Why is a cash flow forecast important?

A cash flow forecast is a vital tool for managing your business finances effectively, because it can help you:

  • Estimate when you’ll become profitable: forecasting your cash position over 12 months can help you identify when your business is likely to break even and start generating profit, making it a useful tool for startups and new businesses.
  • Support business planning and growth: even if your projections are based on estimates, they provide a useful foundation for setting goals and planning activities like marketing or the allocation of resources.
  • Prepare for seasonal changes: if you know sales will spike or dip in certain months, you can adjust your spending accordingly, investing more when revenue is high and conserving cash during slower periods.
  • Align spending with your business values: reviewing your forecast helps ensure you’re allocating funds to areas that support your long-term goals, such as staff development or customer experience.
  • Enable realistic financial decisions: understanding your regular costs allows you to make more informed decisions.
  • Maintain financial control: a forecast gives you visibility into your cash position, helping you to identify areas where you can reduce costs or increase investment, and ultimately avoid financial shortfalls.
When should I make a cash flow forecast?

Your cash flow forecast should be created as part of your business plan, right when you’re looking to start your business. It’s important not to put it off – you want to have a clear idea of how much cash you’re likely to have at all times.

Who is my cash flow forecast for?

Your cash flow forecast can serve different purposes depending on the audience. You might be creating it for yourself, your bank or even potential investors and shareholders. 

If the forecast is for your own internal use, it’s wise to take a cautious approach. Use conservative estimates to build in a buffer for unexpected challenges and ensure you’re prepared for worst-case scenarios.

If you’re sharing it with a bank, lender or investor, the tone may shift slightly to be more optimistic, presenting your business potential in a positive light (while still ensuring your figures are realistic!)

But no matter who your forecast is for, it needs to be accurate. Overly pessimistic or overly optimistic projections can undermine the credibility of your cash flow forecast. The key is to tailor your approach to the audience while ensuring your assumptions remain reasonable and well-justified.

Creating a cash flow forecast: Step-by-step

A cash flow forecast typically includes: 

  • Your expected income (such as from sales and funding)
  • Your outgoing costs (such as wages, operating expenses, and other business overheads)

To get started, all you need is a simple spreadsheet tool like Microsoft Excel or Google Sheets.

Step 1: Set up your spreadsheet

Use a platform such as Excel or Google Sheets to create a simple spreadsheet. Start by choosing your forecast period – weekly, monthly or annually. 

Generally, a 12-24-month range is usually realistic without becoming too speculative.

Create a column for each time period and rows for income, expenses and a final row for your net cash flow (income minus expenses). 

Use colour or formatting to make totals easy to spot.

Step 2: List your income

Add up all expected sources of income. This might include:

  • Sales revenue
  • Savings or emergency funds
  • Grants or loans
  • Investments
  • Dividends or interest

The total gives you your projected income for each time period.

Step 3: List your expenses

Now add all anticipated outgoings, such as:

  • Wages and labour costs
  • Rent and utilities
  • Equipment and supplies
  • Training costs
  • Debts and repayments
  • Value-added tax (VAT), if applicable

This total shows your projected business costs.

Step 4: Calculate your net income

Subtract your total expenses from your total income for each period.

  • If the result is positive, you’re cash flow positive
  • If it’s negative, you’ll need to plan ahead to cover the shortfall

Tracking this over time gives you a clear picture of your business’s financial health. Plus, having this data on hand makes tax time far easier – you’ll already know the key figures and categories needed for your return.

When should you update your cash flow forecast?

Once you’ve created your cash flow forecast, don’t just file it away. Update it regularly, especially when your income or expenses change significantly.

A useful approach is to create two additional versions: one showing a best-case scenario and another showing a worst-case. This helps you prepare for unexpected challenges, like losing a key client or facing rising costs, and gives you a clearer view of how resilient your business really is.

Cashflow jargon buster

Overheads: the money you spend on your business that doesn’t directly relate to your sales.

For example, if you run a pottery business, the clay you buy to produce your pots would be part of the costs of sale, but the electricity that powers your studio would be an overhead.

Other common overheads include insurance, rent, and advertising – in other words, the running costs for your business. One important point here: if you run a services business, then all your costs are overheads.

Cash inflow: this one is nice and easy – it’s the money that comes into your business. This will mainly be from sales, but could also include things like tax rebates, business loans, or other outside investments.

Cash outflow: this one is also pretty straightforward – it’s the money that goes out of your business. Most of this money will be either overheads (see above) or costs of sales (things you buy that are directly related to the things you sell).

Gross profit: your gross profit is the amount of money that you make from sales, minus the costs of sales. In very simple terms, it’s the money you make from selling the things you make (or buy), minus the money you spend making (or buying) the things you sell. If, for example, a business made and sold wooden stools, the gross profit would be the total amount the stools sold for, minus the cost of the wood used to make them.

Net cash inflow: a fancy way of saying that your business is earning more than it’s spending – in other words, it’s making money.

Net cash outflow: a fancy way of saying that your business is spending more than it’s earning – in other words, it’s losing money.

Final thoughts

Creating a cash flow forecast might not be the most glamorous part of running a business, but it’s one of the smartest. With a clear view of what’s coming in and going out, you’ll be better prepared, more confident and ready to make decisions that move your business forward.

Written by:

Leave a comment

Leave a reply

We value your comments but kindly requests all posts are on topic, constructive and respectful. Please review our commenting policy.

Back to Top